Bloomberg News

Xi Faces Economic Test of Courage After Leadership Change

By Bloomberg News
November 15, 2012

China's new Communist Party chief and Politburo Standing Committee member Xi Jinping meets with the press after the closing session of the 18th National Congress of the CPC at the Great Hall of the People in Beijing, China on Nov. 15, 2012. Photographer: Liao Pan/Color China Photo via AP Images

China’s placement of a North Korean- educated economist and an exemplar of debt-fueled infrastructure on its ruling body may add to challenges for Communist Party leader Xi Jinping as he seeks to deepen the nation’s development.

Zhang Dejiang, who studied economics at Kim Il Sung University in Pyongyang, and Zhang Gaoli, whose city began building a mini-Manhattan under his watch, were appointed to the paramount Politburo Standing Committee in Beijing yesterday in the most important phase of a once-a-decade power transition. Xi and Li Keqiang were named the top two members of the panel of seven, along with Yu Zhengsheng, Liu Yunshan and Wang Qishan.

Reducing the government’s presence in the economy may be a key to sustaining growth as an aging population and wage gains erode China’s advantage as the world’s low-cost manufacturer. While Xi’s record includes encouraging private enterprise as chief of coastal Zhejiang province, several colleagues are more steeped in the role of the state.

“A lot depends on whether Xi Jinping has the personality of a leader, the courage of a leader and has put together a coalition that wants to go in the same direction,” said James McGregor, author of the 2012 book “No Ancient Wisdom, No Followers: The Challenges of Authoritarian Capitalism.” “China’s done well in building infrastructure and getting the nation where it is but state industry is choking off economic growth so they have to re-ignite private industry.”

Stock Valuations

Under Hu Jintao, whom Xi replaced as party secretary yesterday, Chinese stock valuations fell more than in any other of the so-called BRIC nations of Brazil, Russia and India. The Shanghai Composite Index dropped 0.8 percent as of 11 a.m. local time, down 18 percent over the past year.

Zhang Dejiang has had responsibility for state-owned companies as vice premier. Liu has supervised media controls and Yu is an engineer, Shanghai party secretary and former construction minister.

Xi, scheduled to succeed Hu as president in March, may face economic growth of 7 percent in 2013, the slowest in 23 years, according to Pacific Investment Management Co., which runs the world’s largest bond fund. Standard Chartered Plc sees a risk of annual expansion slumping to between 3 percent and 4 percent within 10 to 15 years without market-driven change to introduce more competition for state enterprises.

Reform Appetite

Li Keqiang, who holds a legal degree and translated a 1980 book on British law, is set to take over from Premier Wen Jiabao. He has championed rapid urbanization and his association with the World Bank’s “China 2030” report from February on sustaining income and productivity gains may indicate an appetite for reform. Key tasks include breaking up state-owned monopolies, deregulating interest rates, ending under-pricing of natural resources and shifting to consumer-led growth.

China may give more clues on the direction of policy with the appointment of new leaders of the central bank and ministries over the next few months, after indicating this week that officials including People’s Bank of China Governor Zhou Xiaochuan and Commerce Minister Chen Deming will step aside. Based on past practice, Li is likely to take reporters’ questions after becoming premier in March as part of the annual gathering of the National People’s Congress.

State Companies

Zhang Dejiang said in a November 2010 speech in Sichuan province that state-owned enterprises must strive to be “stronger, more excellent and bigger,” the Xinhua News Agency reported. Under his watch, some private auto companies including Zhejiang Gonow Auto Co. were merged into state-run competitors in a process described in Chinese as “the state advances and the private sector retreats.”

While the PBOC has loosened restrictions on lending and deposit rates, it continues to ensure a spread that gives state- owned banks their profit. They in turn lend to state-owned companies at preferable rates, meaning private entrepreneurs pay more to borrow money.

In Zhang Gaoli’s city, the indebted state-owned Tianjin City Infrastructure Construction & Investment Group has projects including construction of a new financial district modeled on Manhattan. It sold a 3 billion yuan ($481 million) one-year note in March at a 4.36 percent coupon, 220 basis points below the one-year bank lending rate at the time.

By contrast, small entrepreneurs in Tianjin can get unsecured loans for 2 percent interest per month, or more than 26 percent a year, according to the 3g210.com website, which provides loan interest rate information.

Leaders’ Presence

The Standing Committee has a “sizable presence of cautious and conservative leaders, such as Zhang Dejiang, Liu Yunshan and Zhang Gaoli,” said Tai Ming Cheung, an associate professor specializing in Asian security at the University of California, San Diego. “When you look for the strategic vision, drive, and ruthless leadership that pushed through critical changes since the beginning of China’s reforms in the late 1970s, it’s hard to find in this new leadership line-up.”

Ahead of yesterday’s announcement, David Zweig, a political scientist at the Hong Kong University of Science and Technology, said that such a group would be reminiscent of the Soviet Union run by General Secretary Leonid Brezhnev in the 1970s and early 1980s.

“If Xi Jinping is saddled with four older leaders who have little or no reform dispositions, a kind of Brezhnevization of the CCP, where sclerosis will take over its leadership, will make it very difficult for him to solve China’s numerous problems and could significantly intensify the Party’s own problems,” Zweig said.

Taking Risks

Barry Naughton, a professor at the University of California at San Diego and author of the 2006 book “The Chinese Economy: Transitions and Growth,” sees the standing committee as being relatively free of factional division.

“This is a lineup that probably will be able to get things done if the leader wants to take it some place positive,” Naughton said. “But we really don’t see any evidence that these people are prepared to take risks or commit to a new direction.’

Andy Mantel, founder and chief executive officer of Pacific Sun Advisors, an asset manager in Hong Kong, took a more positive outlook, saying members’ “hands-on experience in fast- growing coastal regions” is a plus. Six of the seven members served as top officials in China’s coastal regions.

“As an investor in Chinese equities it is positive to know that the new leadership will push forward further economic reforms,” Mantel said.

‘Strong’ Records

David Loevinger, former senior coordinator for China affairs at the U.S. Treasury Department, said the presence of several officials on the 205-member central committee, named Nov. 14, gave him some optimism. He cited Lou Jiwei, chairman of China Investment Corp., the sovereign wealth fund; Liu He, a senior government economic adviser; Guo Shuqing, chief securities regulator; and Bank of China Ltd. Chairman Xiao Gang.

“All of them have a strong record for reform,” said Loevinger, now an Asia analyst in Los Angeles at TCW Group Inc., which oversees $135 billion. The four are set to gain “more senior positions in the government,” he said.

Wang Qishan was appointed to the party’s top disciplinary post, indicating he will lead the fight against corruption after previously being the nation’s top finance official. Ma Kai, a former head of the National Development and Reform Commission now on the 25-member Politburo, could fill a diminished version of Wang’s former role, with Li and Zhang Gaoli also playing sizable roles, said Willy Wo-Lap Lam, an adjunct professor of history at the Chinese University of Hong Kong.

Taking Charge

This arrangement “would imply that Li Keqiang really wants to take charge there, and will be pushing for changes in the management of the economy,” said Steve Tsang, director of the China Policy Institute at the University of Nottingham in England.

With the two top posts in the Chinese Communist Party -- general secretary and chairman of the People’s Liberation Army military commission -- Xi has more legal power than Hu, who had to wait for two years until 2004 for his predecessor Jiang Zemin to step down from the military position. Hu relinquished that role yesterday.

“It will aid Xi Jinping in efforts to establish himself as the center of the new CCP collective leadership,” said Phillip Saunders, director of the Center for the Study of Chinese Military Affairs at the National Defense University in Washington. “Xi will not have to compete with Hu Jintao to establish control of the PLA.”

To contact Bloomberg News staff for this story: Michael Forsythe in Beijing at mforsythe@bloomberg.net; Kevin Hamlin in Beijing at khamlin@bloomberg.net

To contact the editors responsible for this story: Peter Hirschberg at phirschberg@bloomberg.net; Paul Panckhurst at ppanckhurst@bloomberg.net